Software-as-a-Service: Moving Up

According to reports from McKinsey & Company and Forrester, adoption of the Software-as-a-Service model is on the rise. SaaS is moving beyond its place in the small and medium sized business (SMB) space and is increasingly being implemented in larger enterprises. “For platform vendors, the only falloff in interest comes at the largest enterprises, those employing more than 25,000 people. In short, nearly every company – or division of a larger enterprise – is a customer or a prospect for SaaS platforms,” states McKinsey’s 2008 Enterprise Software Customer Survey. This thought is mirrored by Forrester research: “SaaS use is growing across types of applications, companies, and user groups.” The momentum created by this movement is pulling in established software vendors and fueling quick-moving startups. As both vie for position, it is acknowledged that some will fall, but the model is predicted to survive.

Forrester cites “shorter deployment times, faster return on investment (ROI), and pay-as-you-go pricing for new software needs” as factors contributing to increased interest in SaaS.There is some overlap between this assessment and that of McKinsey: “The momentum behind adoption of subscription and on-demand purchasing models is clearly being driven by SMB customers, for whom the pricing models have the greatest initial appeal.” That SMB customers are hoping to save money via SaaS deployments is not a surprise; the new development is wider-scale adoption in the enterprise.

McKinsey notes that more and more enterprises are “converting to the models that underpin SaaS offerings.” Forrester also notes the rise in SaaS adoption in organizations of all sizes. “SaaS usage is significant both at the large enterprise and the SMB level, with multiple SaaS solutions increasingly deployed.” In fact, according to Forrester, a (slightly) higher percentage of large enterprises are using SaaS than their smaller counterparts in the SMB space: 16 percent of large enterprises and 15 percent of SMBs implement SaaS solutions. (That represents an increase of 33 percent over last year’s reported numbers for implementation by enterprises.)

Of course everyone wants in, and, McKinsey points out, the uptake in interest in SaaS is setting the stage for a, “tremendous battle between the largest software vendors and the newer SaaS providers.” McKinsey predicts this battle to be one towards the center. “While each of these players has an advantage at one end of the spectrum (large vendors such as IBM, Oracle, SAP and Microsoft do best in large enterprises, while SaaS “incumbents” such as Salesforce, NetSuite and RightNow are more in favor with small businesses), the real battle is in the mid-market space.”

Rivals are not the only thing that individual vendors will need to overcome in the future. While not new, hurdles present early on for the SaaS model still exist and, even though some of them are dropping this is leading to new challenges.

In its April report, SaaS Clients Face Growing Complexity, Forrester states that among those who do not consider SaaS solutions integration is the top concern. This is not an unfounded fear. Even among those who implement SaaS, “integration can be a challenge, since many SaaS solutions evolved as standalone offerings that their creators sold to business users and therefore did not focus on building out strong integration tools, creating thorough documentation, or writing prebuilt connectors.” McKinsey reports the same: “Whether a SaaS platform vendor is finding a niche or trying to maintain a market advantage, the survey underscores the vital importance of offering customers speedy deployment and a smooth path to integration with existing applications and IT infrastructure. In fact, those factors were selected as the most important twice as often as costs.”

Forrester also reports that concern about data security, an issue with the SaaS model from the beginning, still presents a barrier to adoption. (Half the North American firms and nearly forty percent of European firms which don’t consider SaaS solutions cite data security as the reason.) As with integration, this may not be an irrational concern. Forrester notes that, “Providers entering the SaaS market usually don’t invest heavily in multiple data center locations that would provide the kind of redundancy and disaster recovery that large enterprise clients typically look for.” Furthermore, “the cost of data replication poses challenges to the whole financial model of SaaS providers.”

Finally the growth of the market is its own challenge. New providers and solutions are frequently entering the market which makes it, “difficult for firms to feel secure about the long-term stability of their application purchases.”

“The expansion of the software-as-a-service (SaaS) business model appears to be inevitable. It is both Web 2.0 and business technology (BT) and reflects the wishes of business users to have more control over their IT,” states Forrester in another report. This is probably a good assessment; the model has gained traction despite the continued presence of early challenges and appears set to overcome new ones as they arise. The model is a flexible one.

For Further Reading:

Is the Recession Good for SaaS?
The InformationWeek Blog, May 2, 2008
I heard opposing voices at Interop about whether the bad economy will drive companies to software as a service. IT budgets can be precarious in the best of times, and the current economic recession will affect IT’s ability to spend.

McKinsey Surveys the New Software Landscape
Rough Type, April 29, 2008
A new study, to be released today by McKinsey & Company, reveals in some of the clearest terms yet the sea change that is under way in business software. The consulting firm surveyed more than 850 corporate software buyers, from firms of all sizes, and found that software-as-a-service is rapidly “becoming mainstream,” with three-quarters of software buyers saying they are “favorably disposed to adopting SaaS platforms” for software development and deployment.

Are You Ready for SaaS?
Destination CRM, February 1, 2008
Software-as-a-service (SaaS) seems to be everywhere lately, especially in the CRM space. For small and midsize businesses (SMBs), SaaS has been a popular option for a number of years; now larger enterprises are beginning to adopt it in meaningful numbers. SaaS, it can be said, is ready for you, no matter who you are. But are you ready for SaaS?